Source: http://www.HMRC.gov.uk
Value Added Tax (VAT) is a tax that's charged on most goods and services that VAT-registered businesses provide in the UK. It's also charged on goods and some services that are imported from countries outside the European Union (EU), and brought into the UK from other EU countries.
VAT is charged when a VAT-registered business sells to either another business or to a non-business customer.
When VAT-registered businesses buy goods or services they can generally reclaim the VAT they've paid.
There are three rates of VAT, depending on the goods or services the business provides. The rates are:
- standard - 17.5 per cent
- reduced - 5 per cent
- zero - 0 per cent
There are also some goods and services that are:
- exempt from VAT
- outside the UK VAT system altogether
This guide explains the basics of how VAT works. It tells you where you can find more information and advice.
What is VAT?
VAT is a tax that's charged on most business transactions in the UK. Businesses add VAT to the price they charge when they provide goods and services to:
- business customers - for example a clothing manufacturer adds VAT to the prices they charge a clothes shop
- non-business customers - members of the public or 'consumers' - for example a hairdressing salon includes VAT in the prices they charge members of the public
If you're a VAT-registered business, in most cases you:
- charge VAT on the goods and services you provide
- reclaim the VAT you pay when you buy goods and services for your business
If you're not a VAT-registered business or organisation then you can't reclaim the VAT you pay when you purchase goods and services.
Who charges VAT and what VAT is charged on
VAT-registered businesses add VAT to the sale price of most goods and services they provide.
When you must register for VAT
If you're a business and the goods or services you provide count as what's known as 'taxable supplies' (see 'What is VAT charged on' below) you'll have to register for VAT if either:
- your turnover for the previous 12 months has gone over a specific limit - called the 'VAT threshold' (currently £68,000)
- you think your turnover will soon go over this limit
You can choose to register for VAT if you want, even if you don't have to.
Find out about registering for VAT
What is VAT charged on?
If you're VAT-registered you'll have to charge VAT on any goods and services that you provide in the UK that are VAT taxable. You charge VAT on the full sale price, even if you accept goods in part exchange or through barter instead of money.
Find out which products and services are VAT taxable
How VAT is charged and accounted for
If you're VAT-registered the VAT you add to the sale price of your goods or services is called your 'output tax'. The VAT you pay when you buy goods and services for your business is called your 'input tax'.
Filling in your VAT Return
If you're VAT-registered you'll have to fill in a VAT Return at regular intervals - usually quarterly - and send it to HM Revenue & Customs (HMRC). The return shows:
- the VAT you've charged on your sales to your customers in the period - known as output tax
- the VAT you've paid on your purchases - known as input tax
If the amount of output tax is more than the input tax, then you send the difference to HMRC with your return.
If the input tax is more than your output tax, you claim a VAT repayment on your return.
There are special schemes that some businesses can use to help them work out and pay their VAT.
Read about VAT Returns, payments and repayments
Choose the best VAT accounting scheme for your business
Find out more by visiting: http://www.HMRC.gov.uk